Can the IRS Levy Your TSP Account? Yes. Here Is How It Decides

The Thrift Savings Plan is supposed to be untouchable. For most creditors it is. The IRS is the exception, and federal employees and servicemembers should understand exactly how that exception works, because the IRS's own rules make a TSP levy harder to get than most people think.

The law: TSP balances can be levied for taxes

5 U.S.C. 8437(e)(2) says sums in the Thrift Savings Fund generally may not be assigned or alienated and are not subject to execution, levy, attachment, garnishment or other legal process. Paragraph (3) carves out a few exceptions, and one of them is a federal tax levy. The balance in a participant's account "shall be subject to a Federal tax levy under section 6331 of the Internal Revenue Code."

IRM 5.11.6.3.1 explains the practical difference. For ordinary employer plans, a levy only reaches the taxpayer's present right to payment under the plan's terms. For the TSP, the IRS "can seize the balance in vested TSP accounts" under that special statute. The levy attaches to any TSP account that is vested, or will vest within 30 days of the TSP receiving the levy if the participant stays in service.

Separately, IRM 5.11.7 notes that the automated Federal Payment Levy Program does not levy TSP annuity payments. A TSP levy is a deliberate act by a revenue officer, not an automated hit.

The IRS's three-step test

The manual says the decision to levy a TSP account "should be treated in the same way as a levy on a private pension or retirement plan or IRA," and points to the retirement account procedures in IRM 5.11.6.3. Those procedures set three steps.

Step one: alternatives first

The revenue officer must look for other property and consider a payment agreement before levying retirement assets. The manual adds that an imminent collection statute expiration date, by itself, does not justify levying retirement assets.

Step two: flagrant conduct

This is the big one. "If the taxpayer has not engaged in flagrant conduct, do not levy on retirement accounts." The manual lists examples of flagrant conduct, including:

• Frivolous arguments for not paying.
• Voluntarily contributing to retirement accounts while knowing unpaid taxes were accruing.
• Continuing voluntary contributions while claiming you cannot pay, after the IRS disallowed them as a necessary expense.
• Tax evasion convictions, fraud penalties, illegal income, or placing assets beyond the government's reach.
• A pattern of uncooperative or unresponsive behavior: missed deadlines, missed appointments, broken promises, ignoring contact.

The manual also includes an important caution for federal workers: when a taxpayer verifies they were automatically enrolled to have a limited percentage of basic pay deposited into a retirement account, do not treat that as flagrant conduct. Automatic enrollment is not a scheme.

Step three: do you need the money to live?

"If the taxpayer is dependent on the funds in the retirement account (or will be in the near future), do not levy the retirement account." The IRS uses its financial standards and the life expectancy tables in Publication 590-B to estimate whether you will need the money.

No flagrant conduct, no TSP levy. Most people who end up with one got there by ignoring the IRS, not by owing it.

The approval and mechanics

A TSP levy requires Form 668-R, Notice of Levy on Retirement Plans, and approval by the SB/SE Collection Area Director, according to IRM 5.11.6.3.1. The manual lists TSP-specific requirements: the levy must be in the participant's name only, must refer to the "Thrift Savings Plan," and must demand a stated dollar amount up to the vested balance. It cannot demand payment at a future date, a series of payments, or from a specific fund or source.

After receiving the levy, the TSP sends a decision letter to all parties with an estimated payment amount and date. The manual says payment on a qualifying levy is made 30 days after the TSP decision letter.

The tax consequences

• Income tax. The manual says the payment "is taxable to the participant." The gross amount is reported as income.
• Withholding. The TSP withholds 20% for federal income tax, and the manual says that withholding cannot be waived, increased or decreased. So a levy for a stated amount produces a smaller net payment to the IRS than the gross distribution.
• No 10% additional tax. IRC 72(t)(2)(A)(vii) exempts distributions made on account of an IRS levy from the 10% early distribution tax. The IRM tells revenue officers to send Letters 3257 and 3258 saying so.

The result can be a new tax bill for the year of the levy. Plan for it, or you can end up back where you started.

If the IRS gets it wrong

IRC 6343(f) lets you put back money returned to you after a wrongful levy (and certain erroneous levies) on a retirement plan, including interest, without regard to normal contribution limits, if you do it by the due date (without extensions) of the return for the year the money is returned. The tax on the levied distribution is then treated as if it never happened for the rolled-back amount.

How to keep a TSP levy off the table

1. Respond to every IRS contact. Silence is listed as flagrant conduct.
2. File your returns and keep current-year taxes paid.
3. Consider whether to pause voluntary TSP contributions while you owe. The IRS treats voluntary contributions while claiming inability to pay as flagrant, but notes automatic enrollment percentages are not.
4. Put a resolution in place: an installment agreement or hardship status. See installment agreements and CNC status.
5. If you are thinking of tapping the TSP voluntarily to pay the IRS, read TSP withdrawals to pay the IRS first.

The TSP is protected by more than a statute. It is protected by the IRS's own procedures. Do not give the IRS a reason to set them aside.